JOHN DIDI OMULO v SMALL ENTERPRISES-FINANCE CO. LTD. & ANOTHER [2005] KEHC 3214 (KLR)

REPUBLIC OF KENYA IN THE HIGH COURT OF KENYA AT KISUMU

Civil Case 232 of 1996

JOHN DIDI OMULO……………...................................................………...….PLAINTIFF

VERSUS

SMALL ENTERPRISES-FINANCE CO. LTD. & ANOTHER…….…DEFENDANT

JUDGMENT

In the amended plaint, the plaintiff alleges that sometimes in 1992 the defendants jointly and/or severally conspired by fraud to have executed a personal guarantee ostensibly to secure a loan from the 1st defendant in favour of the 2nd defendant in respect Land Parcel No. Kisumu/Nyalenda B/565.  The plaintiff is now seeking for:

1)A declaration that the alleged charge and personal guarantee executed by the plaintiff are invalid by reason of fraud.

2)A declaration that any monies that may be due to the 1st defendant in respect of the purported charge be paid by the 2nd defendant.

3)general damages for fraud.

4)Costs of the suit.

The 2nd defendant who had obtained the loan but who

defaulted was served but he failed to file appearance within the stipulated period and hence the plaintiff obtained judgment against him.  The first defendant filed its defence and totally denied all the allegations in the plaint.

The plaintiff gave evidence and stated that sometimes in 1992, he approached the 1st defendant to help him to get a pick-up to help in the transportation of fish from Uhanya Beach.  He stated that 1st defendant told him that there was a place that could finance the purchase of the pick-up if he had a title deed.  Since he trusted the 2nd defendant as a fellow fisherman, the plaintiff gave his title document and the plaintiff was taken to CMC Motors may be as a bait.  The plaintiff was given some documents at CMC motors which he signed thinking that he would receive a pick-up as agreed with the 2nd defendant.  He contended that he waited for a pick-up from the 2nd defendant for almost one year, by which time there was no title document or pick up.  The plaintiff stated that he did not know how to write and read and as a result the defendant took advantage of his inability to comprehend the transaction and documents he signed.  He further contended that he did not intend to charge his title document and he was not advanced any monies by 1st defendant.

The 1st defendant called one witness, in the name of George Wachira Waihenya, who is an accountant with the 1st defendant.  He contended that his duties are to disburse loans, managing loan recovery and other financial duties.  The loan was KSh.660,000/= and the plaintiff executed a guarantee dated 3. 2.1992 and it was attested by an Advocate, E.N. Aroka.  It was the evidence of Mr. Wachira that the plaintiff executed a charge over his parcel of land and the charge document is dated 10. 2.1992.  In respect of plot Nyalenda B/565.  According to Mr. Wachira the Company's policy is to finance the loan of an applicant and where an applicant does not have a security he must offer another person to guarantee him wherein, the loan would be processed  and disbursed upon the registration of the instruments.  He further contended that the 1st defendant was not aware of the internal arrangement between the plaintiff and 2nd defendant.  On cross-examination by Mr. Olago-Aluoch Advocate the witness stated.

"The application was processed in Nairobi for consideration.  I did not handle the documentation of the guarantee and charge.  It was handled by the Legal Department.  And it was the responsibility of the Company Secretary to ensure that the person signing the documents understand, what he was signing.  I do not know whether the person who witnessed the signature of Omulo was licensed or not, I know the charge required the consent of the Kisumu land Control Board, but do not have the consent.  On page 1 of the charge, it says the charge was made on 10. 2.92 but was signed on 3. 2.1992. "

Mr. Olago-Aluoch Advocate submitted that the plaintiff has obtained interlocutory judgment against the 2nd defendant and the net effect of that judgment is the second defendant is liable to offset by liability that may arise from the transaction between the plaintiff and 1st defendant.  It was the submission of Mr. Olago-Aluoch Advocate that both the charge and guarantee document were allegedly signed by the plaintiff in the presence of Mr. E. N. Aroka Advocate but there is no evidence from the defendant that the, said Advocate was licensed to practice law in 1992.  Mr. Olago-Aluoch Advocate produced a document from the Law Society of Kenya showing that Mr.  E. N. Aroka last held a practising certificate in 1985.  And he stated that the documents were not properly witnessed and cannot be relied upon in an attempt to realize the security of the plaintiff.

Mr. Olago-Aluoch Advocate also raised the issue of the consent of the Law Control Board, in particular Section 6 of Cap 302 Laws of Kenya, that the defendant did not produce any evidence to show the plaintiff appeared before the Land Control Board.  He further submitted that Section 65 of Cap 300 Laws of Kenya was also breached and urged me to hold that the plaintiff was cheated by Mr. Nyakundi with an active participation of the agents and/or servants of the 1st defendant in Kisumu or that he was cheated by Nyakundi who took advantage of the laxity of the loan application system of the 1st defendant.

Mr. Odunga Advocate countered the submissions of Mr. Olago-Aluoch Advocate saying that the plaintiff has not proved its case against the 1st defendant as the standard of proof in fraud is higher than the normal cases.  He referred me to Civil Appeal No. 215/96: Central Bank Kenya Limited Vs. Trust Bank Limited & 4 Others, where the Court of Appeal held:

"The appellant has made vague and very general allegations of fraud against the respondents.  Fraud and conspiracy to defraud are very serious allegations.  The onus of prima facie proof was much heavier on the appellant in this case then in an ordinary Civil Case."

It was the humble view of Mr. Odunga Advocate that the allegations of fraud only appear in the plaint and nowhere in the evidence of the plaintiff.  The evidence of the plaintiff is that he was cheated by the 2nd defendant, therefore allegation of fraud in the plaint remains mere allegation, since pleadings are not evidence.  He also referred me to the case of:

CMC Aviation Ltd V. Cruisair Ltd (No.1) where Madan J.A. held:

"The pleadings contain the averments of the three parties concerned.  Until they are proved or disproved or there is admission of them or any of them by the parties, they are not evidence and no decision could be founded upon them proof is the foundation of evidence.  As stated in the definition of evidence in Section 3 of the Evidence Act, evidence denotes the means by which an alleged matter of fact, the truth of which is submitted to investigation  is proved or disproved.  Averments are matters the truth of which is submitted for investigation!  until their truth has been established or otherwise they remain unproven.  Averments in no way satisfy, for example, the following definition of evidence in Cassell's English Dictionary Page 394:

"Anything that makes clear or obvious ground for knowledge, indication or testimony that which makes truth evident or renders evident to the mind that it is truth."

The present suit was precipitated by the action of the first defendant to auction the property of the plaintiff which was charged infavour of the 1st defendant through loan obtained by the 2nd defendant.  It is clear from the evidence on record that monies were disbursed to the second defendant as a result of the charge dated 10. 2.1992.  The property which is the subject of the present dispute is registered under Cap 300 Laws of Kenya.  It is important the charge which is infavour of the 1st defendant  not breach the clear provisions of Cap 300 Laws of Kenya.  The charge instrument was produced by the first defendant as exhibit D2 and according to the document, it was prepared by M/s.  S.M. Muhia Advocate of Nairobi.  The said Advocates were acting on behalf of the 1st defendant and prima facie there is no evidence to show the plaintiff was accorded an opportunity to appoint or consult an Advocate of his own choice.  The Advocate who prepared the charge document had a cardinal duty to ensure strict compliance with the provisions of the law.

On the first page of the charge, it shows or says that the charge document was made on 10. 2.1992, while it was signed by the plaintiff on 3. 2.1992.  According to the defendant's own witness, it was the responsibility of the Legal Department to ensure the document which was giving raise to a substantial liability is proper and according to the legal procedure.  In view of that fundamental contradiction the first defendant did not offer any explanation for that grave discrepancy in their document.  It appears the charge document was based on the guarantee which was executed by the plaintiff on 3. 2.92 before Mr. E.N. Aroka, Advocate.  The document which was witnessed by Mr. E.N. Aroka Advocate was prepared by the Advocates of the first defendant.

The property of the plaintiff was being auctioned in realization of the rights under Section 74 of Cap 300, therefore it is mandatory that the chargor understands the effects and import of the said Section.  The requirement that he understands the effects must be incorporated into the charge document and unless that mandatory requirement has been properly understood, then the chargee cannot purport to exercise such a right.  The right under Section 74 is precedent upon fulfilling the requirement under Section 65 (1) of Cap 300. And in my view the first bridge is under Section 65 and until that bridge is properly and legally crossed, the chargee has no authority to exercise his redemption powers as found under Section 74.

Section 74 (1) States:

"If default is made in payment of the principal sum or of any interest or any other periodical payment or of any part thereof or in the performance or observance of any agreement  expressed or implied in any charge and continues for one month, the chargee may serve on the  chargor notice in writing to pay the money owing or to perform and observe the agreement as the case may be."

The agreement which the chargor must perform or observe must be a proper charge agreements which incorporates all the requirement of a proper charge instrument.  If the charge instrument is legally defective then its contents and implication would remain void and a party cannot be made to perform a contract which is void abnitio.  The basic requirement is that you can only observe or made to perform in a requirement which stems from an agreement which is legal and binding on the parties by virtue of being based on the terms of the contracting parties.  In my view a party cannot derivebeneficial result from a document which does not meet the basic criteria of a legal charge.

Section 65 (1) States:

"A proprietor may be an instrument in the prescribed form, charge his land, lease or charge to secure the payment of an existing or a future or a contingent debt or other money or money's worth or the fulfillment of a condition, and the instrument shall except where Section 74 has by the instrument been expressly excluded, contain a special acknowledgment that the chargor understands the effect of that Section and the acknowledgement shall be signed by the chargor or where the chargor is a corporation by one of the persons attesting the affixation of the common seal."

The wording of the section leaves no discretion  and no doubt, therefore in my view the requirement under Section 65(1) is mandatory and must be observed if a chargee wishes to exercise his powers under Section 74 of Cap 300.  The instrument which is the subject of my determination has not been excluded of the reserved powers under Section 74, therefore the special acknowledgement that the chargor understands the effect of Section 74 is expressly mandatory and cannot be waived by either party.  Mr.  Odunga Advocate submitted that Section 65  the R.L.A. was not pleaded contrary to Order 6 Rule 4 of the Civil Procedure Rules.  Order 6 Rule 64 (1) states:

A party shall in any pleading subsequent to a plaint plead specifically any matter, for example performance, release, payment, fraud, inevitable accident, act of God, any relevant statute of limitation or any fact showing illegality:

a)Which he alleges makes any claim or defence of the opposite party not maintainable or:

b)Which if not specifically pleaded, might take the opposite party  by surprise or:

c)Which raises issues of fact not arising out of the preceding pleading.

I am afraid to state that the above rule does not restrict a party's right not to plead matters of law.  It is permissible to plead matters of law or particular provision of the law, but the failure to plead Section 65 of the R.L.A. cannot defeat a right which has matured as a result of the first defendant's failure to observe the fundamental requirement of the said Section.  There is no single provision in the Civil procedure Rules, which states that parties must plead or include in their pleadings all the provisions of the law that would aid the success of their case.  Indeed a pleading which contains all the provisions of the Law that a party intends to rely or would help the success of his case would be able to delimit the issues before Court.  The primary essence of pleading is that it must be precise and be able to inform the other party the case he would meet at the trial to enable him to adequately prepare for his defence.  On that note the submission of Mr. Odunga that the plaintiff did not plead Section 65 of the R.L.A. is with respect trivial and frivolous.  And the same is rejected.

The question that calls for determination is whether the first defendant did observe the mandatory requirement of Section 65 of the R.L.A.  As confirmed by the 1st defendants own witness, the charge was prepared on 10. 2.1992, while it shows the plaintiff signed on 3. 2.1992.  In fact if the charge instrument was prepared on 10. 2.1992, then there is no way that it could have been signed by the plaintiff.  It is inconceivable of how the plaintiff was able to sign on 3. 2.92, when the document was not in existence.  You must first prepare the document and its after actual preparation that the other party can be able to have the opportunity to  execute.  In my understanding the whole process is tainted or shrouded by deception and deceit.  And when issues are shrouded by such clear and uncontroverted discrepancies, then the only available view is that of the plaintiff.

The plaintiff alleges fraud and in the absence of evidence or facts to displace what is before me, I can only come to the inevitable conclusion that the whole process was a design by the 2nd defendant with the participation or connivance with the agents and/or employees of the 1st defendant, inorder to cheat the plaintiff of his property, maybe because of his ignorance.  On my part I cannot conjure any other possible explanation for the way the whole matter was handled.  If it was the first defendants Advocate who prepared the charge and guarantee instrument, he had a duty to ensure all the legal process is compiled with, inorder to minimize the risk of default based on non-observance of the provisions of the law.  The first defendant through its agents based in  Nairobi and Kisumu abdicated in their responsibility, thereby turning the whole process into a design laid by the 2nd defendant perfected by the employees of the first defendant.  I cannot comprehend how an Advocate appointed by the first defendant to prepare and execute such instrument was not able to ensure that the documents were executed before him.

The first defendant failed to even bring before Court evidence to show that the plaintiff actually appeared before an Advocate and executed the documents.  It is incumbent upon the 1st defendant to bring before Court evidence like a copy of the identity card of the plaintiff to support the allegation that he actually signed the instruments.  There is no evidence to show that Mr. E. N. Aroka Advocate was licensed to practice law as at the time he allegedly witnessed the two instruments.  The plaintiff though Mr. Olago-Aluoch Advocate produced without any objection a document from the Law Society of Kenya showing Mr. E. N. Aroka last held a practising certificate in 1985, which means he was not authorized, to witness a legal document.  In my view the documents were not properly witnessed and cannot be relied upon in our attempt to realize the security of the plaintiff.

It is clear beyond doubt that the person who witnessed the signature of the plaintiff was not holding a current practising certificate at the time he purportedly acted as an Advocate.  In my view the documents were improperly witnessed and cannot give raise to a genuine claim against the plaintiff.  Mr. E. N. Aroka was not a qualified Advocate and according to Sections 31, 33 and 34 of Cap 16 unqualified person cannot purport to exercise the rights and duties of a qualified Advocate, therefore the documents prepared by the first defendant's Advocates but which were truly witnessed by a person who was not an Advocate are void.  By preparing such important documents and leaving them to be witnessed by a person of suspicious qualification was in itself an abdication of a legal responsibility bestowed on the Advocates for the first defendant.  In the circumstances it is my humble opinion that the 1st defendant did not observe the mandatory terms, that a charge instrument must have a provision to be signed by the chargor and the witness, to show that the chargor understands the effects and consequences of Section 74 of the R.L.A.  The charge document breaches the clear provision of Section 65 of the R.L.A.   In that the chargor duly understands the direct effects of failure to observe the terms and condition of the charge.  The terms of repayment of the loan advanced must be explained to the chargor and he must acknowledge that his failure to repay the loan as agreed would automatically give raise to the sale of his charged preparedly.  I appreciate the charge document was proposed by the Advocates for 1st defendant and their omission to ensure the provision under Section 65 of the R.L.A. was part of the instrument and to ensure the document was signed by the chargor and in the presence of a qualified Advocate is tantamount to an illegality, which renders the whole instrument invalid and unenforceable against the plaintiff.

Inview of what I have stated, I hold that the plaintiff did not understand the whole transaction and in particular I believe his evidence that he did not appear before an Advocate and above all he didn’t intend to charge his title deed to the 1st defendant.  It is my view the charge and guarantee documents were part of the design formulated by the 2nd defendant solely with the intention of defrauding the plaintiff and which design completed in conjunction or inaction of the 1st defendant.  The plaintiff fall into a trap well laid and perfectly prepared by the 2nd defendant and needless to mention with the active participation of the agents of the first defendant.  On my part I am prepared to dismantle the trap and annihilate the design inorder to protect the plaintiff who has been seeking justice since 1996 when he filed the present suit.  Justice may have been delayed but in my view whenever is done, it is sweet and timely.

The other issue what calls for my determination is the consent from the Land Control Board.  Mr. Wachira stated that the charge in question required the consent from the Kisumu Land Control Board.  The first defendant did not produce any evidence to show that the plaintiff ever appeared before the Control Board with a view to charge his property.  There was no consent and there is no minutes from the Land Control Board to show that consent was sought and obtained.  The first defendant did produce even an application  made to the Control Board to displace the allegation of the plaintiff that he never intended to charge his property to obtain loan from the first defendant.  The charge required the consent of the Land Control Board before it could be lodged for registration.  And the failure to  seek and obtain consent makes the charge  defective and invalid.  According to Section 6 of Cap 302 Laws of Kenya any dealing in Agricultural Land, whether sale, transfer, lease, mortgage, exchange, partition or other disposal of or dealing of a land which is situated within a Land Control area, is void for all purposes unless the Land Control Board has given consent.  n respect of that transaction.  If the plaintiff has averred that he did not seek a consent and he did not appear before any Land Control Board in respect of parcel  No. Kisumu/Nyalenda B/565 and there is no evidence countering such allegation, I am bound to accept the same.  In my understanding if an act is void it is void abinitio, which means a transaction based on an act which is void is materially void and no party can get any benefit from such transaction.

In the circumstances, I am satisfied that the plaintiff's case must succeed and has succeeded with orders as hereunder:

a)A declaration that the alleged charge and guarantee executed by the plaintiff is invalid and hereby declared illegal.

b)A declaration that all or any monies that may be due to the 1st defendant in respect of the charge shall be paid by 2nd defendant.

c)The 1st defendant shall return the plaintiff's title with immediate effect and after effecting the necessary discharge at its own costs.

d)     The plaintiff shall have the costs of the suit to be paid by 1st defendant.

Delivered and Dated this 18th day May of 2005 at Kisumu.

M. WARSAME

JUDGE